Smaller banks embrace home loans as others step away

Published: Monday, May 5, 2014 at 1:00 a.m.

Last Modified: Monday, May 5, 2014 at 12:26 a.m.

While many Southwest Florida community banks are walking away from the home loan business, other lenders consider residential mortgages a path to growth.

Several key area lenders are shunning the traditional — and traditionally stable — mortgage business because of new mortgage rules designed to protect borrowers from lender abuses that contributed to the Great Recession.

Those lenders contend the mandate to better determine a borrower's ability to repay debt, for instance, have created cumbersome and costly compliance burdens that will shave profit margins on lending.

As a result, they have trimmed down or eliminated their residential lending departments. In a few instances, banks have farmed out their mortgage lending to third parties.

Earlier this year, Bay Cities Bank of Tampa, which recently opened a loan production office in Sarasota, chose to lay off employees who had handled mortgage lending rather than stay in the business amid the new rules.

“The new mortgage rules are a serious challenge, especially in the near term, for mortgage lending,” said Robert Davis, executive vice president at the American Bankers Association, a leading industry trade group.

“The problem will last at least as long as bankers calibrate their compliance systems, and perhaps much longer,” Davis added.

For consumers, the shift will make it more difficult for some potential borrowers to secure loans, analysts say.

But where some lenders see increased costs, other community bankers see opportunity.

Insignia Bank of Sarasota has tripled its home lending staff, on the belief that it can be a small bank that specializes in big home loans.

“I wake up every day and see more opportunities in residential lending in Sarasota and Manatee counties,” said Insignia president and chief executive Charles Brown III. “I think we have at least two strong years in front of us.”

The new mortgage rules, which took effect in January and are being spearheaded by the Consumer Financial Protection Bureau, give smaller banks the ability and flexibility to offer home loans, especially so-called “jumbo loans” that exceed $417,000.

Insignia, with $153 million in assets, qualifies as a small bank under the bureau's determination.

With the new rules, smaller banks are allowed to use “common sense” lending standards — rather than specific debt-to-income rules — to customize loans for borrowers, Brown said.

“With our capital base, we can do over $100 million worth,” Brown said.

Sabal Palm Bank of Sarasota, at $90 million in assets the region's smallest bank, spent more than a year gearing up for the new mortgage rules.

“Once we learned more about it, most changes weren't necessarily negative,” said bank CEO Neil McCurry. “We saw the opportunity to do more residential lending.”

Since opening in 2006, two years before the nation's longest and deepest economic recession in seven decades took root in Southwest Florida, Sabal Palm has grown slowly.

McCurry, who built and sold the former Peoples Community Bank, bought into Sabal Palm last year and says residential lending represents a key area for long-term growth.

“There is still a lot of opportunity out there,” he said. “People want to own a home, whether it's pent-up demand, or to buy a bigger home or a different home because their lives have changed.”

The new Consumer Financial rules require lenders to make sure that borrowers have the financial ability to repay their mortgages. The lenders are then protected from borrower lawsuits when they issue a so-called “qualified mortgage,” or QM letter.

Analysts say those rules should not impact most borrowers who are buying a home or refinancing an existing loan, because many home lenders had already taken steps independently to tighten their credit standards in the wake of the financial meltdown.

Only about 13 percent of the mortgages issued in 2012 would have failed to meet the QM standards, according to research by data provider CoreLogic.

Under QM loan standards, home loans cannot increase the borrower's total debt to above 43 percent of their monthly gross income, unless they are eligible for backing by federally backed groups such as Fannie Mae or Freddie Mac.

QM loans also cannot contain repayment terms that exceed 30 years, or features such as interest-only payments that are considered risky and that many analysts contend ultimately led to mortgage defaults during the recession.

Loans above $100,000 also cannot charge more than 3 percent in upfront points or fees.

Banks are still able to make loans outside those rules, but they will have less protection from legal challenges if a borrower defaults.

While bankers like Brown and McCurry expect to grow their home loan businesses internally, others have taken a vastly different approach and backed away from such lending altogether.

In a similar vein, Sarasota's Gateway Bank of Southwest Florida, along with its sister banks, decided to form an affiliate that lets an Orlando mortgage company handle its residential loans, from origination to closing.

McCurry, who has hired a compliance expert to interpret the new rules, said he understands why some banks are stepping away from residential lending.

“It's the wrong thing to do if you're not ready for it,” he said, of the bureau's new mandates.

While the rules are aimed at beefing up consumer protection, bankers acknowledge that some borrowers may ultimately find it harder to obtain loans.

Eighty percent of U.S. banks expect the new mortgage regulations will reduce credit availability, according to a recent survey by bankers association.

In the survey, more than one-third of the banks that responded said they would only issue QM loans. Another third said they would make non-qualified loans, but only to targeted markets or with specific products.

Ironically, though, most of the bankers questioned also reported that their institutions had made the highest percentage of single-family mortgages since the financial crisis.

At the same time, 13 percent of those loans went to first-time home buyers, the most in six years.

Brown says the bureau's mandates represent a rare instance where new regulations actually benefit community banks, which he says played an “insignificant role” in the mortgage crisis.

Smaller banks have more leeway to use “common sense” lending standards rather than the strict debt-to-income requirement for qualified mortgages that big banks must follow, he said.

Insignia, which has added four residential lenders along with the compliance specialist, is able to tailor large mortgages for customers like business owners from the Northeast, who want to buy second homes in Southwest Florida in advance of retiring. Other borrowers might have sizable assets invested but not the income flow to qualify under the QM standards.

“It is tougher,” Brown said of the new lending environment. “But our pipeline is filling up quickly. We continue to book more loans than the month before.”

<p>While many Southwest Florida community banks are walking away from the home loan business, other lenders consider residential mortgages a path to growth.</p><p>Several key area lenders are shunning the traditional — and traditionally stable — mortgage business because of new mortgage rules designed to protect borrowers from lender abuses that contributed to the Great Recession.</p><p>Those lenders contend the mandate to better determine a borrower's ability to repay debt, for instance, have created cumbersome and costly compliance burdens that will shave profit margins on lending.</p><p>As a result, they have trimmed down or eliminated their residential lending departments. In a few instances, banks have farmed out their mortgage lending to third parties.</p><p>Earlier this year, Bay Cities Bank of Tampa, which recently opened a loan production office in Sarasota, chose to lay off employees who had handled mortgage lending rather than stay in the business amid the new rules. </p><p>“The new mortgage rules are a serious challenge, especially in the near term, for mortgage lending,” said Robert Davis, executive vice president at the American Bankers Association, a leading industry trade group.</p><p>“The problem will last at least as long as bankers calibrate their compliance systems, and perhaps much longer,” Davis added.</p><p>For consumers, the shift will make it more difficult for some potential borrowers to secure loans, analysts say.</p><p>But where some lenders see increased costs, other community bankers see opportunity.</p><p>Insignia Bank of Sarasota has tripled its home lending staff, on the belief that it can be a small bank that specializes in big home loans.</p><p>“I wake up every day and see more opportunities in residential lending in Sarasota and Manatee counties,” said Insignia president and chief executive Charles Brown III. “I think we have at least two strong years in front of us.”</p><p>The new mortgage rules, which took effect in January and are being spearheaded by the Consumer Financial Protection Bureau, give smaller banks the ability and flexibility to offer home loans, especially so-called “jumbo loans” that exceed $417,000.</p><p>Insignia, with $153 million in assets, qualifies as a small bank under the bureau's determination.</p><p>With the new rules, smaller banks are allowed to use “common sense” lending standards — rather than specific debt-to-income rules — to customize loans for borrowers, Brown said.</p><p>“With our capital base, we can do over $100 million worth,” Brown said.</p><p>Sabal Palm Bank of Sarasota, at $90 million in assets the region's smallest bank, spent more than a year gearing up for the new mortgage rules.</p><p>“Once we learned more about it, most changes weren't necessarily negative,” said bank CEO Neil McCurry. “We saw the opportunity to do more residential lending.”</p><p>Since opening in 2006, two years before the nation's longest and deepest economic recession in seven decades took root in Southwest Florida, Sabal Palm has grown slowly. </p><p>McCurry, who built and sold the former Peoples Community Bank, bought into Sabal Palm last year and says residential lending represents a key area for long-term growth.</p><p>“There is still a lot of opportunity out there,” he said. “People want to own a home, whether it's pent-up demand, or to buy a bigger home or a different home because their lives have changed.”</p><p>The new Consumer Financial rules require lenders to make sure that borrowers have the financial ability to repay their mortgages. The lenders are then protected from borrower lawsuits when they issue a so-called “qualified mortgage,” or QM letter.</p><p>Analysts say those rules should not impact most borrowers who are buying a home or refinancing an existing loan, because many home lenders had already taken steps independently to tighten their credit standards in the wake of the financial meltdown.</p><p>Only about 13 percent of the mortgages issued in 2012 would have failed to meet the QM standards, according to research by data provider CoreLogic.</p><p>Under QM loan standards, home loans cannot increase the borrower's total debt to above 43 percent of their monthly gross income, unless they are eligible for backing by federally backed groups such as Fannie Mae or Freddie Mac.</p><p>QM loans also cannot contain repayment terms that exceed 30 years, or features such as interest-only payments that are considered risky and that many analysts contend ultimately led to mortgage defaults during the recession.</p><p>Loans above $100,000 also cannot charge more than 3 percent in upfront points or fees.</p><p>Banks are still able to make loans outside those rules, but they will have less protection from legal challenges if a borrower defaults.</p><p>While bankers like Brown and McCurry expect to grow their home loan businesses internally, others have taken a vastly different approach and backed away from such lending altogether.</p><p>Bay Cities Bank, for instance, shed its entire eight-member team that handled mortgage lending.</p><p>In a similar vein, Sarasota's Gateway Bank of Southwest Florida, along with its sister banks, decided to form an affiliate that lets an Orlando mortgage company handle its residential loans, from origination to closing.</p><p>McCurry, who has hired a compliance expert to interpret the new rules, said he understands why some banks are stepping away from residential lending.</p><p>“It's the wrong thing to do if you're not ready for it,” he said, of the bureau's new mandates.</p><p>While the rules are aimed at beefing up consumer protection, bankers acknowledge that some borrowers may ultimately find it harder to obtain loans.</p><p>Eighty percent of U.S. banks expect the new mortgage regulations will reduce credit availability, according to a recent survey by bankers association.</p><p>In the survey, more than one-third of the banks that responded said they would only issue QM loans. Another third said they would make non-qualified loans, but only to targeted markets or with specific products.</p><p>Ironically, though, most of the bankers questioned also reported that their institutions had made the highest percentage of single-family mortgages since the financial crisis.</p><p>At the same time, 13 percent of those loans went to first-time home buyers, the most in six years.</p><p>Brown says the bureau's mandates represent a rare instance where new regulations actually benefit community banks, which he says played an “insignificant role” in the mortgage crisis.</p><p>Smaller banks have more leeway to use “common sense” lending standards rather than the strict debt-to-income requirement for qualified mortgages that big banks must follow, he said.</p><p>Insignia, which has added four residential lenders along with the compliance specialist, is able to tailor large mortgages for customers like business owners from the Northeast, who want to buy second homes in Southwest Florida in advance of retiring. Other borrowers might have sizable assets invested but not the income flow to qualify under the QM standards.</p><p>“It is tougher,” Brown said of the new lending environment. “But our pipeline is filling up quickly. We continue to book more loans than the month before.”</p>